The Pacific : Japan Special Bank to Rescue Credit Firms : Bailout: Outgoing official finally admits huge bad debt problem. One estimate of non-performing loans held by banking system is $700 billion.

Japan’s central bank, in its first emergency bailout of private lending institutions, has agreed to set up a special bank to rescue two ailing credit firms.

Bank of Japan Governor Yasushi Mieno told a news conference on Friday that the rescue was needed as an emergency measure to solve worsening asset problems at the two Tokyo-based credit institutions and to secure a stable Japanese financial system.

Finance Minister Masayoshi Takemura said separately that the measure was also aimed at protecting depositors.

The two institutions, Anzen Credit Bank and Tokyo Kyowa Credit Assn., are saddled with total bad assets of $1 billion, Mieno said.

Analysts said the move was welcome reassurance of official commitment to ensuring the stability of the banking system.

The bailout was announced shortly after Mieno, the outgoing central bank governor, finally admitted that Japanese banks are struggling with a “huge” amount of bad debt and conceded that they will not solve the problem soon.

Mieno’s comments contrasted sharply with repeated declarations he made throughout 1994 that the debt problem had passed its peak and would be solved in a year or two.

He did reiterate his earlier view that bad loans have stopped increasing. But for the first time, he admitted that “the overall recovery (of the banks) will take much more time” to complete. He blamed what he called the “sluggish” real estate market for prolonging the trouble.

Nearly all Japanese banks insist on taking real estate as collateral when making loans.

Alicia Ogawa, vice president for equity research at Salomon Brothers Asia Ltd., acknowledged that “growth of non-performing loans is undoubtedly slowing down.” But she disputed Mieno’s claim that bad loans have stopped increasing. To the contrary, they are still growing, she said.

Although the economy has started moving upward again after a three-year recession, Kenneth S. Courtis, strategist and senior economist for Deutsche Bank Capital Markets Asia, said bad debts held by banks “represent a massive negative for the entire economy” that make a return to healthy economic growth “problematic.”

Hoping that land values will rise eventually, even though prices are still falling, banks have refused to dispose of commercial properties they hold as collateral. Instead of selling off land, they have been selling stocks to accumulate reserves to cover loans unlikely to be repaid--which, in turn, has contributed to a decline in prices on the Tokyo Stock Exchange.

Banks here do not disclose data on loans for which they have reduced interest rates to help beleaguered borrowers; this practice differs from the United States, which considers such loans to be part of bad debt.

In addition, only Japan’s top 21 banks, providing 45% of the outstanding loans in Japan, are required to disclose figures on loans to companies that have gone bankrupt or which have paid no interest for six months or more.

Full disclosure of bad debts could damage public trust in Japanese banks and should not be done until “measures to enable the public to accept the disclosures calmly” are taken, said Mieno, who will retire on Friday.

Mieno spoke last week after Japan’s top 21 banks announced April-September results that showed they had failed again to make significant headway in reducing bad debts. New bad debts were emerging nearly as fast as banks wrote off old bad debts.

The 21 banks announced that they wrote off a record $20 billion in bad loans in the six-month period. But the total fell by only $2 billion to $133.3 billion.

Further, that tiny improvement concealed a deterioration. Ogawa noted that the announcements showed a 1.8% decrease in bad loans.

But if loans sold to the Cooperative Credit Purchasing Co. (CCPC) are included, the real change was a 3.1% increase.

When CCPC buys a loan from a bank, that clears the bad loan from the bank’s books. But the bank doesn’t receive the money until land backing the loan as collateral is sold. So far, CCPC land sales have amounted to only 3% of the loans it has taken over from the banks. “The (bad loan) problem is by no means behind us,” Ogawa said.

She noted that banks have been devoting a major share of their profits to writing off bad loans for three years--yet have managed only to dispose of 13% of risky loans they made in the late 1980s “bubble economy” to real estate, construction and non-bank financial institutions.

For the remaining risky loans, “we would not expect the recovery rate to be anywhere near as high as 87%,” Ogawa said.

The bank announcements, moreover, failed to cover an estimated separate batch of $130 billion in loans to non-bank financial institutions. They, in turn, are inundated under a mass of their own real estate loans that have gone sour.

Last June, Takashi Hosomi, a former vice finance minister who now heads the NLI Research Institute, the Tokyo-based think tank of Nippon Life Insurance Co., estimated that the real amount of bad loans held by the entire banking system is $700 billion.